A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, the exchange rate should reflect the relative differences in prices between two countries. In this case, we can use the price of a Big Mac to estimate the exchange rate between yen and pesos.

The price of a Big Mac in Japan is 400 yen, while in Mexico it is 50 pesos. This means that, according to the theory, 1 yen should be worth the same as 8 pesos (400 yen ÷ 50 pesos = 8). Therefore, the exchange rate should be 1 peso = 0.125 yen (1 ÷ 8 = 0.125), or equivalently, 1 yen = 8 pesos.

Choice B is the correct answer because it reflects this exchange rate.

A Big Mac Costs 400 Yen in Japan and 50